Can your shares have a side gig? How Betterment’s securities lending works

With more and more of our lives being lived through a screen, it’s easy to forget the investments you own exist in the real world. They’re brick-and-mortar businesses, for example, or interest-bearing bonds.

Not only can you buy and sell these assets on the open market, you can temporarily loan them out to banks, hedge funds, and others in exchange for income. This is what’s known as securities lending, or "sec" lending for short, and it’s one of the newer ways we're helping your money work harder. So let’s break down the mechanics of the program and help you decide whether opting in makes sense.

We offer sec lending through Apex, the same trusted partner who helps us handle thousands of trades each day. When you enroll in the program, the shares in your taxable, IRA, and HSA accounts are eligible to be lent out in exchange for income from borrowers. You, Betterment, and Apex split the income, with more details on the arrangement available in our sec lending disclosure.

The exact dollar amount of lending income depends on a few factors, like how many shares you have, the demand for those particular shares, and how long they stay on loan. There's no guarantee your shares will find a borrower on any given day, and income tends to ebb and flow with the market.

Because of these variables, it can help to think of sec lending as a low-effort side gig for your securities. And similar to tax-loss harvesting, it can help to have it turned on and ready to take advantage of short-term swings in the market. All automatically, with no work needed on your part.

Stay in control, while we stay on top of taxes

For many, the decision to opt in comes down to the potential downsides, so we’ve worked hard to minimize them.

For starters, you can opt in and opt out of the program at any time, at no cost. When you’re opted in, you stay fully invested while your shares are out on loan. This means any potential gains in value are still yours, and you can sell the shares at any time.

When you lend a single stock, one tradeoff is that you temporarily lose its proxy voting rights while out on loan. These are the rights to vote on the policies, board members, and other decisions of that particular company. But it’s important to note that when it comes to exchange traded funds (ETFs), the proxy voting rights of their underlying companies have already been delegated to the ETF’s manager.

Taxes have historically been one of the bigger potential drawbacks of sec lending. That's because the qualified or exempt dividends your investments may pay out while on loan are replaced with cash payments, which could be taxed at a higher rate.

That's where Betterment's tax-aware approach comes into play, helping limit your potential tax impact in a couple ways:

• We prioritize loans that still generate net-positive lending income after accounting for additional estimated taxes, which we estimate using the information you provide in your financial profile.
• We handle the remaining estimated tax impact (to the extent it’s not covered by your lending income) by issuing you an annual credit.

The end result is a lending program designed to let you loan with confidence.

The banks, hedge funds, and other financial institutions ultimately borrowing your shares are typically supporting strategies like short selling (betting a share falls in price), hedging (buying an insurance policy of sorts for other investments they own), or matching buyers with sellers as a service.

When players like these borrow securities, it’s common practice for them to put up at least 100% cash collateral to mitigate the risk of loss and reassure lenders like you, and that’s exactly the case with Betterment’s sec lending program. Apex deposits the collateral with a custodian, which is then administered by a trustee.

Any shares you loan aren't covered by SIPC insurance, an industry backstop that guards against broker failure, which is why that collateral matters. In the rare event that Apex can’t return your shares, the cash collateral is there to make you whole.

Securities lending likely won’t result in a windfall, but if you already hold eligible stocks and ETFs, it can be a low-effort way to squeeze more value out of them while staying invested. You stay in control, can opt in and out at will, and can sell loaned shares at any time. And our tax-aware approach helps guard against taxes reducing your profits. To opt in, first update your financial profile, then head to Portfolio Controls in Settings (Settings > Accounts on desktop).